Are You Really A Growth Or A Value Investor?

January 01, 1999

Research in psychology and management development argues that individuals have preferences for analyzing, interpreting and assimilating information. These traits or characteristics are second nature to individuals. Style investing may be too.

Carl Jung proposed that one's personality is formed by different cognitive patterns an individual uses to perceive information and make judgments. He argued that these preferences to identify and evaluate information are developed at an early age. Researchers such as Stumpf and Mullen, and Myers-Briggs have applied these basic personality traits to better understand the motivations behind corporate managers.

In similar light, these "natural" preferences in an individual may cause one to migrate towards a more "growthy" orientation or towards a more value bent.

Investment styles are not solely born out of the types of companies that managers investigate. Style investing is also based on an individual's preference for making decisions or on the comfort level at making an investment in some asset depending on the type of available information.

The four dimensions more formalized in the Myers-Briggs Type Indicator or MBTI are methods of identifying information (sensing and intuition), how one initiates a search for information (introversion or extroversion), preferences for making decisions (judging and perceiving), and methods of evaluating information (thinking or feeling.)

In identifying, sensing dominance refers to individuals who prefer to examine the data. Individuals with a predisposition to use intuition tend to rely on more internal views with an eye to the future. Avalue investor is more sensing dominant. The need to work in an investing environment with some metric to observe an asset class and make decisions places one more on the side of value.

In most instances, the intrinsic value of a growth stock can be difficult to quantify.

Conversely, an individual more comfortable with innovation might simply be bored looking for value stocks. An individual closer to being intuition dominant is more likely to be a growth investor. Acapital market with a booming calendar of initial public offerings offers a wealth of innovative, future thinking stories to invest in or with. Such an environment is more ideal for someone who needs less structure to make decisions. An intuitive reading of the management's hopes and dreams may be more compelling to such an individual than the cost of capital and the economics of the industry. An unstructured world of fast growing firms might be a difficult place for managers who require an abundance of deliverable metrics but ideal for someone with a bent towards intuition for identifying information.

Individuals also appear to have a preference in the manner of arriving at conclusions - one may have a predisposition towards judging or perceiving.

Judging types tend to live in an orderly and decisive manner; perception dominant types tend to be more spontaneous and flexible. The preference for "judging" suggests a value based investor. An attempt to pin down the intrinsic value of a stock requires an individual with a need for a more orderly world. A manager with a leaning towards growth is more of a perceiving type. She may need less structure and more flexibility to arrive at a conclusion.

Jung also argued that individuals have a preference for where they initiate their search for information. One can begin his search from an inner world of concepts or ideas - called introversion. Or one can have a preference for the outer world of actions, objects and people - called extroversion. An individual with more of a bias to long held beliefs and asset valuations is more likely introversion dominant. Conversely, an individual more prone to look outwardly in search of new paradigms is more likely to hold a looser view of the traditional return on investment concepts. Such an individual is more likely to look for growth stocks, not value scenarios.

When evaluating, thinking dominant individuals prefer to make judgments objectively and impersonally. They tend to be more analytical and use more logic. An individual more prone to evaluate information with feeling tends to make decisions based not only on the information, but also on the potential impact to their surrounding.

Investment managers, both growth and value, tend to be more analytic and therefore thinking dominant. Yet, it is not unreasonable to make a distinction between investors that can choose to buy an asset with less quantifiable information than other managers. To this extent, the more extreme thinking dominant investor may be the more value-driven.

An individual with a leaning towards the use of hard evidence, a need for existing rules and measures to be applied in a consistent manner, could not be comfortable investing in "high flying," aggressive growth situations. In similar light, an individual with a bias towards the use of creative valuation models, a tendency to look beyond the conventional, may be severely challenged in a value box.

It is possible that investors have always acted according to their instincts, and only recently have researchers and market participants been able to label the differences along the lines of growth and value. -

 

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